DR-CAFTA & Costa Rica

In 2005 what is now known as DR-CAFTA was ratified in the US by a narrow majority. The Central American Free Trade Agreement would in 2006 include El Salvador, Honduras, Nicaragua, Guatemala & the Dominican Republic. Costa Rica was the only member to put this trade agreement to a public referendum, which narrowly passed in 2007, and was signed into law in 2009.

DR-CAFTA countries

Free trade agreements from a liberal economic perspective create employment opportunities, improve efficiency and productivity, reduce costs and are generally good for everyone. From a more radical or nationalistic perspective they negatively effect the domestic economy, give power, money and resources to foreign investors, create uneven development and contribute to under-development of countries as the power stays with the traditional centres. As such the DR-CAFTA agreement was hotly debated and generated conflicting viewpoints.

Costa Rica’s referendum is particularly interesting. The “Yes” vote narrowly won on October 7th 2007. 51.6% of voters said they approved of the CAFTA agreement for their country. The referendum was preceded by significant pressure from the US to ratify CAFTA. Republican leaders had threatened to withdraw the Caribbean Basin Initiative (CBI) that had eliminated tariffs on many of Costa Rica’s exports to the US if the terms of CAFTA were not agreed to. Other US companies such as Sardimar also threatened to leave Costa Rica. Even the US ambassador to Costa Rica, Mark Langdale, had warned of future economic difficulties for Costa Rica if CAFTA was not ratified. The CBI already ensured low tariffs on Costa Rican goods so there was little to be gained for Costa Rican exporters as a result of CAFTA.

Ciudad Colón, Costa Rica

Evidence seems to show that support for CAFTA was strongest in the more heavily populated, urban areas, where the industry and development is concentrated, and least strong in rural areas. This matches with a critical theory view of free trade policies. Small hold farmers and other small business owners stand to lose the most when economies are opened up to foreign investment. Particularly when a free trade agreement such as CAFTA liberalizes trade between such mismatched countries as those in Central America with the biggest economy in the world. Of particular worry for Costa Rican farmers is the experience of their Mexican counterparts following the ratification of NAFTA. US growers are furnished with lavish subsidies from the government that means US farmers can sell their produce for lower prices. This makes it impossible for suppliers from other countries to compete. This forced many Mexicans out of work in the farms, and contributed to the flow of illegal immigration into the US from Mexico.

Without corn there is no country

The fact that Costa Rica held a referendum pays tribute to the education system and a well-informed population. The 96.1% literacy rate has been achieved by a succession of governments that have prioritised education above military service. The army was abolished in 1949 and the money saved was spent on the education system. Even before the approval for CAFTA the Costa Rican economy was strong, showing healthy growth for many years, in fact posting a 5.3% compound growth rate since 1991. Indeed much of the opposition to CAFTA came from supporters of a bi-lateral agreement with the US, instead of being included with the other Central American nations (see Otton Solis). A common criticism of neo-liberal economic policies is that they often focus on inappropriate and non-specific regulations instead of country specific rules.

Anti free trade signs

It is difficult to say what effects joining DR-CAFTA has had on Costa Rica’s economy as every economy suffered after the global crisis in 2007. Costa Rica’s suffered along with everyone else but now looks to be climbing again.

The problem with using the growth of GDP as a measure of the economic health of a country is that it only tells part of the story. When a developing country opens up markets to foreign firms a number of things happen. If the country has unused raw materials the foreign companies are normally adept at getting the most efficient use out of them. Costa Rica’s main exports for a long time were coffee, bananas and pineapples. These are still a big part of the economy but arguably now the most important raw material are Costa Ricans themselves. As mentioned earlier Costa Rica has an educated workforce that operates in the same time zone as much of the US and still comes cheap. For a while I was teaching English to Costa Rican students who had their course fees paid for by a government scheme. In order to make Costa Rica more attractive to outside investors the government made a promise to pay for huge numbers of Costa Ricans to get to an upper-intermediate standard in English, making them more useful to foreign firms. This is great for many Ticos who now have the opportunity to work in firms who have the ability to train them and pay them more than local firms. They get experience of working in more efficient business cultures at the same time as improving their own and their family’s lives.

All around Costa Rica there are numerous Zona Francas, these operate in much the same way as the special export processing zones in Asia. Companies are encouraged to move parts of their operation to these zones by tax incentives. What often happens though as a result of the introduction of foreign firms into developing countries is that the opportunities for progression to the top are limited. Real development for Costa Rica should show lots of Costa Rican business rising to compete with foreign firms. When the market is controlled by 3 or 4 huge multinational companies this becomes very difficult. Multinationals can utilise their economies of scale that are unavailable by any smaller, local firms. The local firms can neither pay the same wages nor offer the same opportunities as the foreign companies. Currently the top two private employers in CR are Wal-Mart and Hewlett-Packard, with HP expecting to add another 2000 jobs in the next year. It is hard to describe this as bad news. Many of my friends work for HP and they certainly believe that the investment in Costa Rica by foreign companies has been good for them. Not least a decent wage, training, opportunities and the prestige that comes with working for an internationally recognised firm. HP moved a small part of their operation here in 2003 initially with only 123 employees, this has now risen to 6500. Costa Rica has to continue to encourage foreign companies to invest here to give its citizens more opportunities. If HP were to find a better offer in another country, they would move there leaving 6500 Ticos looking for work.

As the referendum result shows many people are not pleased about CAFTA, a friend who works for the Costa Rican operation of a US investment and loan company told that she voted “No” in the CAFTA referendum as she was concerned about foreign companies gaining access to Costa Rica’s resources. This highlights the contradictions of Free Trade Areas. Once a market has been opened and barriers reduced to foreign firms, they move parts of their operation to take advantage of lower costs than in their home country. Workers in developing countries are given opportunities to get better jobs and earn more money when working for foreign firms. The best employees find their way to these companies, who can then use their size and power to control the economic environment. My friend is herself a Costa Rican resource that has been appropriated by a US company, of course at the same time she benefits from this arrangement. Another employee of the same company told me that he used to do a similar job for a smaller Costa Rican-owned firm but changed to the bigger US company as they could offer better benefits and wages. The advantage of reduced tariffs to Costa Rican goods entering the US will be be reduced if there are no Costa Rican firms.

This neo-liberal model of development has always been used by the most powerful economies simply because they have the most to gain. Free trade was encouraged by the British Empire over 200 years ago in order to reduce tariffs on their substantial exports. The smaller countries often have little choice but to submit to the system. The US has continued this tactic. After the Marshall Plan helped to rebuild the economy and infrastructure of post-war Europe and Japan, the US recognised these as potentially huge new markets for the efficient factory production systems that had been developed in the US. Prosperous capitalist economies were also believed to be a strong barrier against the infiltration of communism. The more people had to gain from being a part of the global capitalist system the less likely they would be to succumb to the “Red Menace”. The US has persuaded other countries to join the capitalist system. Certainly living standards have been raised significantly, however whether this is due to neoliberal economic policy or a result of more mercantilist policies in East Asia is under debate. It is closer to the truth to say that countries that follow the neoliberal development path succeed in creating the conditions for the rich to get richer while the wealth gap to the poor gets larger still. Countries following this path rush to industrialise and liberalise their economies, which is environmentally unsustainable and ensures that the power remains with the large countries. By agreeing to become a part of CAFTA, Costa Rica ensured better opportunities for many of its citizens while at the same time ensuring the under-development of Costa Rica for generations to come.